The Slippery Structural Deficit

Euro-zone governments are likely to give Spain, at least implicitly, some leeway on next year’s 3% deficit target at a meeting of finance ministers next week. How? Officials say they would allow Spain to meet a “structural deficit” of 3% next year, instead of an actual deficit of 3%.

The structural deficit is what the actual deficit would be were the economy operating at full capacity. The Spanish economy, with an unemployment rate of around 24%, is operating well below capacity; that translates into lower government revenue, more safety-net spending and a higher actual deficit, part of which should disappear when the economy recovers.

The move is part of a shift by the EU to rely more on the structural balance in national budget reviews. This is reinforced bythe bloc’s proposed new “Fiscal Compact,” which calls on governments to enshrine a structural deficit limit of 0.5% of GDP in national law. The hope is they can identify budget weaknesses (or strengths) that are masked by the current state of the economy.

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